Top health industry issues of 2020: US health organizations are seeking opportunities overseas and through innovation. Beware of the tax risks

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US-based healthcare organizations increasingly are hunting for new ways to grow their healthcare mission overseas and through investments in novel technologies and business models. Their objectives can range from extending healthcare services to new communities to unearthing rich new sources of funds.

But global interests bring risks around tax, as do activities related to innovation. In 2020, as US health organizations continue to expand overseas, and into innovative ways of managing people’s health, they should reconsider tax processes and obligations to avoid stumbling into perilous situations.

True or false? The OECD wants to profoundly change the way member nations tax digital business activity.

This is true! In October, the OECD published a proposal that, if its provisions were adopted by member countries, would fundamentally change the way digital business activity is taxed, changes that could profoundly impact global healthcare organizations.

Eighty-five percent of the top US-based for-profit provider companies, tax-exempt provider organizations, payers, and life sciences companies are operating overseas, according to an HRI analysis of the holdings and activities of the five largest US-based companies and organizations in each health sector by 2018 revenue.[i] These organizations are operating hospitals and behavioral health facilities outside the US. They’re running retail pharmacies in South America and selling health plans to people in dozens of countries.[ii] And, as life sciences companies have for decades, they are manufacturing and marketing medicines and medical devices used by millions of people around the globe.

Ninety percent of this group of large health organizations also are seeking income in innovation, HRI’s analysis found.[iii] They’re funding venture capital funds, operating accelerators, incubators and innovation labs, and striking partnerships aimed at nurturing innovation. Their investments include research and development of new treatments and cures, digital therapeutics directed at chronic disease management, and technology that can monitor surgical blood loss in real time (see Figure 6).

Figure 6: Top companies from all health sectors are investing overseas and in innovation

All of this activity is occurring in an atmosphere of increased tax scrutiny by local and national governments. The Group of 20 and the Organisation for Economic Co-operation and Development (OECD), aiming to help member nations tax profits where business activity takes place, published guidance — known as “BEPS 1.0” — around base erosion and profit shifting.[iv] BEPS guidance is being adopted unevenly across nations, but it addresses issues including treaty abuse, transfer pricing and mobile workforces.[v]

Bigger changes to international taxation could be on the way as well. In October 2019, the Secretariat of the OECD published a bold proposal for taxing the digital economy.[vi] The so-called Pillar 1 Unified Approach proposes allocating taxing rights to nations where digital consumers are located rather than focusing on the location of the business.[vii]

In November 2019, the Secretariat of the OECD requested comments on its “Global Anti-Base Erosion” proposal, or “GLoBE,” proposing common global minimum tax rules for nations partaking in the OECD framework.[viii] The proposal lays out tax rules that would affect large international businesses with the possibility of increasing tax and compliance obligations for enterprises across industries.[ix]

The US health industry’s activity overseas is, meanwhile, growing along with its appetite for innovation. Take Centene Corp., which was started in the basement of a Milwaukee hospital 35 years ago and now operates in 32 states and four international markets.[x] That includes Spain, where Centene owns stakes in the concessionaire of the University Hospital of Torrejón de Ardoz in Madrid and the company that manages the hospital, Ribera Salud Group.[xi] Centene also is funding innovation — up to $100 million in research in precision medicine at Washington University School of Medicine in St. Louis, where the company is now based.[xii]

Founded in 2014, the nonprofit’s Providence Ventures manages $300 million in venture capital, with $5 million to $15 million investments in enterprises such as San Francisco digital therapeutics company Omada Health; Kyruus, a provider search and scheduling company based in Boston; and Sqord, a Seattle-based children’s platform for wearables.[xiv]

Or take Seattle-based Providence Health & Services, one of the country’s largest tax-exempt providers. The organization, which operates 51 hospitals and more than 800 clinics in seven states and has partnerships in Guatemala and Mexico, was established by the Sisters of Providence in the 1850s in Vancouver.[xiii]

Some of these healthcare companies and organizations are exporting innovation, whether it be information technology, B2B solutions or digital therapeutics. “It’s not just bricks-and-mortar presence. It’s also products and services like data infrastructure,” Christopher Khoury of the American Medical Association told HRI. “There’s a leapfrog opportunity where innovation is exported and new global entities have a chance to incorporate without the baggage of legacy systems.”[xv]

Such investments in global businesses and innovation can come with significant tax implications. They mean swelling overseas workforces and business travelers crossing borders, raising critical questions about taxation for employees and their employers. Nations seeking to maximize tax collections may view large numbers of business travelers as evidence that a company has a permanent establishment. Or they may seek to collect additional taxes from those travelers, classifying them as temporary workers instead.

These expansions also mean considerations around transfer pricing, as health products, services and intellectual property are delivered to people and enterprises in other countries. They mean tax strategies around mergers and acquisitions, particularly for tax-exempt organizations involved in innovation that wish to avoid challenges to their tax status or reputations.

These issues mean extra planning by tax departments, human resources and C-suite executives. They could mean investments in expertise and technology to monitor and document the flow of workers traveling abroad, heightened awareness of changes around transfer pricing, and planning for deals that don’t result in adverse tax scenarios.

On the corporate level, mobile workforces can affect tax obligations and cross-border employment structures, withholding and payroll compliance, deductions for stock-based compensation and whether a company will have a permanent establishment.[xvi]

Even employees who frequently travel overseas may have to pay individual income and employment taxes in the host countries, and the corporation also may be subject to income and value-added taxes. A host country also may seek to classify the company as a permanent establishment, subject to a range of new taxes, because of the mobile workforce.

The key to effectively managing these scenarios is to plan ahead, monitor business travel and mobile workers, ensure that documentation is complete, and do regular risk assessments. Treaties offering relief from personal income taxes for workers on short business trips may be complex, and require complicated and costly documentation for compliance.

Prepare for increased scrutiny of the digital economy

A significant emerging international tax development is revision of the rules on cross-border taxation, prompted by increasing digitalization and globalization of business. In February 2019, the OECD Inclusive Framework, a group of more than 130 countries assembled to consider global tax changes, released a consultation document addressing the tax challenges of the digitalization of the economy. The consultation document details potential options for changing international tax rules under two main “pillars”: profit reallocation and nexus issues; and global anti-base-erosion rules.

In October, the OECD published a Pillar 1 proposal to rewrite international profit allocation rules in ways that, if ultimately implemented, would fundamentally alter the current international tax system. In November 2019, the OECD released a Pillar 2 proposal for a global minimum tax as well.

US-based healthcare organizations with operations abroad may find themselves in the middle of shifting regulations and laws around taxation as nations grapple with the question. Unilateral measures, which some countries have adopted or are considering, would subject many companies to double taxation, with a chilling effect on global investment and economic growth. The goal of the OECD project is to prevent, or ultimately roll back, such unilateral actions.